Rupee to remain under pressure

The ongoing quarterly results season, macroeconomic data announcements and movement of the rupee will determine the stock market trend this week, say experts.

Mumbai: While the recent reversal in global oil prices has led a recovery in rupee from its record low, industry experts believe that the current liquidity crisis in the non-banking finance companies (NBFCs) is likely to put more pressure on the local currency in the near term.

According to private sector lender HDFC Bank, the NBFC problem is one that could linger on for some time and might continue to weigh on Indian assets and the rupee.

“The spike in the short-term borrowing cost and the likely liquidity deficit could pose a threat to the real economy to some extent. In the short term, any major default on their debt commitments could drive ‘risk-off’ in the Indian market and impact the rupee–dollar rates,” said Abheek Barua, chief economist at HDFC Bank.

NBFCs generally source funds by issuing debt instruments like bonds, nonconvertible debentures, CDs, CPs, mortgages, and leases along with a significant funding from banks. By the very nature of their businesses, there is an element of asset liability mismatch at times, more so for companies those borrow primarily through short-term instruments and finance long-term assets like infrastructure.

“Following the default by a major NBFC (IL&FS), domestic insurance companies, banks, provident funds and mutual funds, which were the major lenders or buyer of debt instruments of the NBFCs, have become somewhat reluctant to lend. As a result, the cost of borrowing for NBFCs has gone up. For example, interest rate on 3-months AAA CP (which was a major source of funding for the NBFCs) has risen by 40 basis points to 8.5 per cent within a span of three weeks,” Mr Barua added.

Noting that there has been a decline in the commercial paper issuances in September, HDFC Bank said, at 141, CP issuances in September were in fact lowest since June 2010, as per the data compiled from PRIME Database.

Mutual funds are also facing redemption pressures and an estimated Rs 2.1 lakh crore has flown out of liquid and money market funds in September.

“Against such a backdrop, there is a small risk of a liquidity squeeze for the NBFCs, with around Rs 80,000 to Rs 1,00,000 crore of their debt papers coming up for redemption between November and March. While we do not see the prospect of a major crisis, there are some legitimate questions about redemptions and rollovers including the possibility of default. This could in an extreme situation foster contagion across this lender class and disrupt the markets,” he added.